CHICAGO (CN) – A federal judge disqualified Locke Lord as counsel in a shareholder dispute after finding that the law firm improperly sided with the individual executive defendants over its corporate clients.
Krakow Business Park (KBP) was formed in Poland in 1997 to buy and develop real estate near the Krakow airport. It owns several large office buildings and a railway station.
Minority shareholders Jan Domanus and Andrew Kozlowski filed suit in 2008 against the company’s manager, Adam Swiech, several alleged shell companies, and Swiech’s wife and brother. They claim that Swiech and his alleged co-conspirators looted KBP of more than $30 million in a fraud scheme that has spanned a decade.
In April 2012, U.S. District Judge Elaine Bucklo blocked Swiech from issuing 1,200 new KBP shares. The plaintiffs claimed that the issuance of new shares was part of a plan to dilute their ownership interest and steamroller KBP’s merger attempts.
Last week, Bucklo disqualified KBP’s counsel, Locke Lord LLP, for violating the rule of corporate neutrality by siding with the individual defendants.
Locke Lord employs more than 650 attorneys worldwide and was ranked No. 68 in American Lawyer’s list of top 100 law firms in 2011.
But Bucklo found that the firm is not looking out for KBP’s interests in fighting the shareholders’ lawsuit, which “is effectively brought by the corporation, with the shareholders as its representatives.”
“That the management board of KBP contains no disinterested directors raises a red flag,” she wrote. “In a situation where the directors of a corporation are accused of fraud, it is imperative that the corporation make an independent determination as to how to proceed.”
“The appointment of counsel for a corporation run solely by directors accused of wrongdoing poses the risk that the directors may seek to impose their will upon the corporate counsel,” Bucklo added. “There is no evidence before me to indicate that the KBP directors took any steps to minimize the conflict inherence in hiring (and presumably supervising) corporate counsel under these circumstances. It was their duty to do so.”
Swiech’s lawyer used documents produced by Locke Lord to fight criminal charges in Poland, Bucklo found. “Given that Adam Swiech is charged with defrauding the very clients that Locke Lord represents, however, Locke Lord should have taken steps to prevent its work product from being used by Adam Swiech in the criminal proceedings,” she wrote.
“Simply put, the evidence brought forth by plaintiffs shows that the KBP entities are attempting to defend the suit on the merits, an action they may take only when the derivative suit threatens their corporate interests,” the 17-page decision states
Domanus and Kozlowski seek punitive and compensatory damages, and imposition of a constructive trust for the benefit of KBP. Bucklo noted that “either plaintiffs can prove their claims or they cannot, but the KBP entities lose nothing by their efforts.
“Because the complaint does not seek relief adverse to the derivative defendants’ interests, they cannot defend on the merits,” she added. “Although couched as a cross-claim, that is exactly what the KBP entities seek to do in this case.”